The speculative public is incorrigible. It will buy anything, at any price, if there seems to be some “action” in progress.
– Benjamin Graham, The Intelligent Investor

Jonathan Chevreau has written a couple of columns (here and here) and blog posts (here and here) on the place (or not) that gold has in a portfolio. As gold recently crossed the $800 (US) per ounce threshold, gold bugs are coming out of the woodwork saying “I told you so!” and putting a “target” of as much as $2,500 per ounce.

Gold enthusiasts (including a self-serving recommendation from the Millennium BullionFund that gold should make up 50% of a portfolio) correctly point out that gold is poorly correlated with other asset classes. True enough but correlation isn’t the only reason to add an asset to a portfolio. More importantly, every asset class should provide an expected positive return by holding it over the long-term. Gold fails this test miserably. It provides no ongoing income in the form of dividends or interest and in fact, costs money to store and insure. The best that can be said about gold’s price over the long-term is that it can be expected to keep pace with inflation.

Fortunately, there are some sane voices in the growing chorus for buying gold. Mr. Chevreau quotes financial advisor Fred Kirby who points out that real return bonds and REITs share some of the correlation characteristics of gold while providing an expected positive real return over the long-term. Also, if you must have bullion in your portfolio, there are better ways that buying the Millennium BullionFund. There is no ETF that tracks the price of platinum that I know of but streetTRACKS Gold Shares ETF (GLD) tracks the price of gold for a MER of 0.40% and iShares Silver Trust (SLV) tracks the price of silver for a MER of 0.50%. Note that both GLD and SLV trade at a discount or premium to the price of the underlying commodity. The precious metal ETFs charge significantly less fees than BullionFund’s MER of 2.25% plus a front-end load of 5%.

This article has 17 comments

  1. It may keep pace with inflation, but how fast will inflation be in the future, with the US printing loads of money?

    I wouldn’t buy straight gold though, as you’re dead right… it doesn’t make any money (it just is money). I want to MAKE money, not just have it sit there. I guess that’s why I’m more interested in gold/silver mining/exploration companies if I want gold in my portfolio.

  2. I guess as an engineer, I’ve never been interested in gold as it has little if any value as an industrial metal. The biggest industrial consumers of gold are jewellers and that industry is subject to the whims of the economy (people don’t NEED more bling-bling when times are tough). Silver used to be consumed in massive industrial quantities, but the largest industrial user of silver is slowly collapsing – the photofinishing industry was the biggest consumer of silver in the form of silver nitrate for developing film.

    Although I’ve never bought any commodities directly, I would personally prefer to invest in agricultural products, basically food & beverage. As long as there’s people in the world, there will always be a demand for food and drink. It’s certainly MY favourite commodity!!! =0)

  3. I agree with Nabloid, investing in precious metals companies is a good way to get exposure in your portfolio.

    Silver is both a precious metal and an industrial metal, as Phil has pointed out. Though I would suggest that photofinishing wasn’t that large of a consumer of silver as the vast majority of their silver was recycled from previous photofinishing.

    Talk of gold going to $2500 an ounce sounds ludicrous. Though if it did, I would say the majority of the reason would be due to a devaluation of the US$, which gold is priced in.

    Precious Metals funds have done very well over the past 5 years, averaging 20-30% yearly growth.

  4. I am buying gold, only as an insurance, not as an asset class. Gold works, when currency fails.

    It is a poor investment vehicle. Speculators will push the price to any limits — just like what they did in .COM era.

  5. My only gold exposure is an indirect stake through Teck Cominco. Even then, it’s insignificant relative to my overall portfolio. I’m a newbie when it comes to gold. Being a Canadian investor (holding Canadian dollar), doesn’t that provide a natural negative correlation against the US greenbuck? Relative to Cdn $$, gold hasn’t gone up that much.

  6. If the price of gold (in US$) goes up mostly because of the decline of the US$, then you can achieve the same result by holding other currencies like the C$, which most of us already do. Thus far the BoC has shown no intention to try to match the US$ decline and race the Fed to the bottom. As a Canadian with most of my money in C$, I don’t see much value in gold even as an inflation hedge, because it’s only a hedge against Canadian inflation.

  7. Canadian Capitalist

    Yes, the flight of the loonie has taken some shine off gold’s luster but it has doubled in C$ terms over the past few years. You can successfully make a case for investing in gold equities because they are a leveraged bet on gold’s price movements but Canadian investors already have significant exposure in that area.

  8. Gold has gone up 26% in US$ terms in 2007 and 6% in CAD$ terms in 2007.

  9. The inflation hedge argument for gold doesn’t make much sense to me. If I were truly concerned about inflation, then wouldn’t it reason that I should instead invest in the products against which inflation is measured? Food & energy as part of the volatile portion of the CPI which is usually taken out of the core CPI calculation. And buying real estate and manufacturers of consumer products to make up for the core CPI. They don’t measure CPI against the price of gold.

  10. Willfly, I like the idea of a little bit of a backup plan, but even gold in times of emergency might not always do the trick if everyone is after food/water…

    FinancialJungle, Yes, the CND$ has some of that correlation you speak of… until we end up with some stupid North American Union, of which Canada and Mexico would have absolutely no say (a majority vote by U.S. would be held) and lose ownership of all resources to the collective Union… and from that would come an Amero currency… If things get too bad with the USD, don’t you think they will push for a North American Currency & Union? Plus, that would add a lot of assets to their currently crappy balance sheet, allow thier companies and people access to vast resources…

  11. Phil, the CPI is a poor way to track REAL inflation for the people and its a small basket of goods, it doesn’t give the best idea of OVERALL inflation. They include things like milk… which is highly regulated. I mean, how much is milk going to go up when its super regulated and controlled? I just don’t like the CPI and find it to be a poor way to measure inflation.

  12. Canadian Capitalist

    Nabloid: Five years ago, it was us Canadians who wanted a monetary union. My, how times change! I just don’t share in conspiracy theories. We are a sovereign country and we will stay that way…

    Yes, the CPI is an imperfect measure. In fact, even under the current methodology StatsCan has made errors in the past but it’s better than nothing. Even if CPI is a perfect measure, it isn’t going to satisfy everyone. Your inflation experience is likely to be different than mine because we will almost surely spend money on different things.

  13. Pingback: Claymore Gold Bullion Trust (CGL.UN) | Canadian Capitalist

  14. Pingback: How to invest in physical gold bullion through bars or coins | Canadian Capitalist

  15. Owning gold shares makes absolutely no sense if you don’t own gold directly. What is the point of owning companies that produce gold if you don’t understand / invest / care about gold itself.

    Sheesh, some people just don’t get it,

  16. Pingback: Why Gold Prices go up? | MoneySense

  17. Pingback: Why Gold could be a Bubble | Canadian Capitalist